Financing Contingency. What you need to know about not losing your earnest money!
Continuing with the contingency series, today I want to talk about the financing contingency. If you been reading and following the other blogs you already know that a contingency is in addition to the main body of a purchase agreement for residential real estate. For those of you that are new and just joining, I’ll do a quick recap and say the contingency is something that is in place in a contract, to allow the buyer to get out of a contract should there be an issue.
Regarding the financing contingency, the biggest piece to this is being approved for a mortgage. Most of the contingencies as written say something along the lines of, if buyer cannot secure the financing specified in this purchase agreement, and the purchase agreement does not close on the closing date specified, this purchase agreement is canceled. Buyers and sellers shall immediately sign the cancellation of purchase agreement confirming said cancellation and directing all earnest money to be refunded to the buyer. This is your way out of purchasing a home if you can’t qualify for the financing. This is not to say that you shouldn’t go to a loan officer before you write the offer and get fully approved for the loan. This just gives you an option to get out if somehow your financial situation were to change.
- There’s other piece is to this contingency which include
- Is the seller contributing to the buyers closing costs?
- Is this a first mortgage only?
- Is a privately insured mortgage?
- Is the rate fixed for a specific amount of time or is it an arm?
- Is there a cap on the interest rate? Meaning that if the interest rates climb above a certain percentage rate before the buyer locks in, can the buyer cancel the contract?
- If the seller does not feel comfortable with the above cancellation language, do they want a final underwriting letter by a specific date from the loan officer?
- When are you the buyer, locking into your interest rate? Is it within five business days of final acceptance of the purchase agreement or at any time prior to closing as required by lender?
- Are there any lender commitment work orders that you will be asking the seller to pay for?
This is pretty standard language whether you are using a conventional mortgage, FHA or VA loan. However if you’re using an FHA loan there’s an additional escape clause in the contingency that says if the home does not appraise at or above the purchase price the buyer can cancel the contract. You can also agree to renegotiate the purchase price at that point as well but it’s spelled out pretty clearly in the FHA contingency addendum in addition along with lender processing fees there is a portion that asks for any work orders will the seller or buyer be responsible for any reinspection fees?
Talking about this is just further proof that you need to hire a licensed real estate agent to help you through the process regardless of whether your a buyer or a seller. If you have more specific questions, please feel free to send me an email or call.
Tom Sommers Edina Realty 952-994-7204 firstname.lastname@example.org